For years I have been updating a 1920s comparison chart on this site, until mid 2015. That’s when the current bull market started falling behind compared to the 1920s, as reported in this post. I want to revisit this chart today and the reason will be clear from this updated chart:
The current bull market has reached the point where it is just as long as the great 1920s advance. And the market is at new all time highs. The recent run-up has not been nearly as spectacular as the final push in 1928-29, but the price pattern still shows a nice similarity over this entire period.
Of course, there is no law that says that bull markets have to be equally long. But I zoomed in a bit more closely and compared the recent price action to the final year before the 1929 peak. This is what I got:
Daily price action doesn’t get much more similar than this, especially in the final 7 months. A six month sideways phase gave way to a final rally that lasted a little over three months. Even the smaller six weeks sideways before the final three weeks upward thrust to the top gets repeated. If this is not a mere coincidence then we are now within days of a major top.
The gains are smaller (which is not abnormal in a bull market that “only” triples from its starting lows), but the price pattern is almost a photocopy.
What could go wrong? Well, it’s never good to get married to a price pattern. There is also another possibility to consider here. In the 1920s the final runaway mania stage didn’t start until the Fed had really started hiking interest rates several times in a row. Bonds are not a place to be when rates are going up (which pushes bond prices down), so more investors started getting into stocks (which happened to be going up every day, making them hard to resist).
This time the Fed has waited longer to hike rates, so the final runaway stage may just be getting started now. We will know if the market keeps going up in March and April. In the 1920s an acceleration came once the market had more than tripled from its lows and we are now very close to triple again. This could be a sudden “phase change” just like water starts cooking at a certain temperature. Vapor behaves differently from liquid water, and just so a market that goes into blow-off mode behaves very differently. Buying begets more buying and people who stayed in bonds start feeling stupid compared to their friends who are driving nice new cars they bought on the back of their stocks market gains. It starts feeding onto itself.
Sure, some people will keep warning about overvaluations. But investors won’t listen. Why not? Because it is well known that most investors suffer from “superiority bias“. Just like almost 90% of drivers think they have above average driving skills, investors typically believe they have above average investing skills. If you happen to think that your investing skill is below average then you will probably keep your money in a savings account, or hand it over to a money manager (who is usually having even more superiority bias than a retail investor). The result is that participants in the stock market are almost invariably believing that they will be able to get out before stocks go down.
This may happen again and we are probably close to the point where this phase change can start.